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the industry as compared to the course of dealings between the debtor and transferee and compares those
to the transfers that the trustee is seeking to avoid.
Creditors commonly refer to 11 USC 547(c)(4) as a defense in a preference action, which provides a
safe harbor for transfers when new value (as defined in 11 USC 547(a)(2)) is subsequently provided.
This is intended to encourage creditors to continue to do business with distressed debtors. In order for a
potentially avoidable transfer to be defended by the provision of new value by the creditor, such new
value must have been provided after the transfer that the trustee is seeking to avoid, cannot have been
secured by an unavoidable security interest, and as of the petition date, the debtor must not have repaid
the new value with an unavoidable transfer. New goods or services provided by the creditor after it re-
ceives an avoidable transfer will provide a defense against the avoidable transfer up to the amount of
new value provided. Any new value provided in excess of the prior avoidable transfer does not provide a
defense against future avoidable transfers. Total new value provided during the preference reach back
period (as defined in 11 USC 547(b)(4)) cannot simply be netted against total transfers during the same
period. Finally, the new value must remain unpaid as of the petition date or have been paid by an avoid-
able transfer. An application of new value is illustrated here. As it demonstrates, the remaining avoida-
ble transfers after application of new value is $20,000, not the $10,000 difference between the total
transfers and the total new value provided.
New value can either be provided directly to the debtor or extended to a third party for the benefit of the
debtor. When evaluating the application of new value to a potentially avoidable transfer, practitioners
should understand how the local jurisdiction in which a matter will be tried considers the effective date
that a transfer was made (that is, the date a check was received by the creditors versus the date that it
cleared the bank) and the date that new value is considered to be provided.
As discussed, avoidable transfers can include liens given to creditors. However, 11 USC 547(c)(5) ex-
cludes perfected security interests in inventory or receivables or the proceeds of either that arise during
the preference period, except to the extent that there has been an improvement in the creditor’s position
as of the petition date and that improvement prejudices unsecured creditors. This "floating lien" is creat-
ed when a lender has a security interest in a pool of assets such as inventory or receivables that continu-
ally changes. The difference in the collateral value between the petition date and either the beginning of
the preference period (as defined in 11 USC 547(b)(4)) or the date at which the lender gave value creat-
ing the security interest is evaluated to determine whether there was an avoidable transfer. If there is a
decrease in the creditor’s deficiency between those dates, that difference is an avoidable transfer. For
example, assume that a creditor has a lien on widgets inventory. The debtor sells $5,000 worth of widg-
ets and subsequently makes another $5,000 worth of widgets to replace the sold inventory. There is no
further sales or production before the petition date. In this example, the net change in inventory is zero
and the creditor is in the same secured position; thus, there is no avoidable transfer. However, if the val-
ue of the inventory had increased by $7,000 as of the petition date, such increase would be an avoidable
transfer.
Fraudulent Transfers and Obligations (11 USC 548)
The purpose of fraudulent transfer avoidance law is to prevent the debtor from transferring or encumber-
ing its property, either with the intent of avoiding payment to creditors or the effect of depleting the es-
tate available to creditors through unjust transactions preceding bankruptcy. 11 USC 548 permits the
trustee to avoid transfers of interests in debtor property and obligations incurred by the debtor that are
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